Standardising the ESG revolution

By Gayatri Raman, Head of EMEA and APAC, Clearwater Analytics 

The asset management industry is undergoing a revolution in sustainability. In an effort to encourage investment and deliver a new stream of growth, many organisations have already chosen to focus on a range of green initiatives. These include the Task Force on Climate Related Financial Disclosures (TCFD), Socially Responsible Investment (SRI), and the United Nations Principles for Responsible Investing (UN PRI). By placing a premium on businesses that are creating positive social impact, investors are increasingly incorporating these considerations into their decision making.

Particularly within Europe, responsible investment – namely underpinned by the Environmental, Social and Governance (ESG) regulations – has skyrocketed in popularity. In fact, across the region, 50 percent of net inflows – excess cash for managers to invest – went into ESG-related funds last year. This class of investing entails using sustainable, ethical, and corporate governance factors to forecast a company’s future financial performance and thus, its value. Therefore, investment decisions are now being determined by metrics such as an organisation’s carbon footprint or the diversity of its workforce.

While many companies have voluntarily signed up for these sustainable initiatives, responsible investing will soon become a core business obligation. As Europe becomes the first region to introduce a standardised approach to ESG reporting with the Sustainable Finance Disclosure Regulation (SFDR), there is no denying that asset management is undergoing a revolution. While asset management firms are taking a positive step towards greater sustainability, more needs to be done to make a real difference to our planet. But first, the industry needs to align on a commonly accepted definition of sustainable funds, and what it means to be sustainable. In doing so, they will enable the market to make strides in minimising environmental impact and be a force for good in the fight against climate change.

A new frontier for ESG

Although many firms have started labelling their funds as sustainable, and thus worth investing in, there are no widely accepted guidelines on how to reach this benchmark. The title of sustainable investment is often used broadly and can refer to a host of factors, from the company’s level of greenhouse gas emissions to its employee relations and level of diversity within the workforce. Due to this ambiguity, over 100 external ESG data providers are offering a range of sustainability ratings for organisations – all calculated using different metrics and methodologies. Furthermore, with ESG standards greatly diverging, the lack of credibility is creating confusion and complexity for investors in the decision-making process.

Without an industry consensus, responsible investing has become increasingly complicated and, by extension, actually has a negative impact on whether assets are indeed sustainable. Clearwater’s recent survey, in partnership with Sionic, found that the lack of criteria on sustainability has been detrimental to European firms’ readiness for the ESG revolution. For example, asset owners have received inconsistent ESG reports between managers, causing concerns about the quality and relevance of these documents. Thus, the challenge lies in assessing and comparing ESG information across portfolios, severely hampering the ability of investors to make accurate and well-informed choices.

Setting the standard for reporting

To enable investors to accurately compare funds across a range of sustainability factors, both asset owners and managers must offer more consistent reporting and assessment of data. Clearwater’s research found that 72 percent of asset owners want to standardise the ESG-related reports generated by managers, yet only 18 percent can currently do this. 

With standardised reporting, investors can have a clear view and comparison of a company’s ESG performance and therefore identify any potential investment risks. It is critical that regulators adopt a benchmark on sustainability to ensure, regardless of the firm, ESG reporting is uniform and effective. But where do you even begin?  It must start with a clear view of sustainable assets.

Harnessing data to drive sustainability

To provide investors with a consistent view of sustainability assets, firms need robust data on ESG metrics. Yet, the institutional investment market is hampered by disparate and inconsistent data sources, causing issues in measuring sustainability, and making consistent reporting impossible. 

For reporting to be transparent and reliable, asset managers and owners need to optimise their data management platform and ensure it is fit-for-purpose. Implementing technology that can aggregate and map complex ESG data across a multitude of sources. With such a solution, businesses can access reports tailored to their specific sustainability needs, tracking the metrics that matter to them. At the same time, the responsible investment teams can access accurate, consolidated data and analytics, bolstering, and fundamentally, informing the decision-making process. Thus, by leveraging technology, asset owners and managers can not only improve the client experience and internal reporting, but also provide investors with more well-informed, sustainable insights.

Preparing for the ESG revolution

With interest in ESG continuing to gain traction, more must be done to standardise responsible investing across the asset management sector. However, the onus is not on a single firm; the industry as a whole must come together to create benchmarks that will have a real-world impact.

As it stands, without robust data on ESG, firms are offering investors inaccurate and incomplete data, hampering their credibility and doing little good for sustainability causes. To resolve this, the asset management industry must align on a clear and uniform definition of sustainable funds and investments. Only then can asset managers and owners restore their reputation and be at the forefront of the ESG revolution, helping investors drive positive environmental and societal impact, alongside business growth. Now that’s a goal!